Main menu

Post navigation

Public Spending Cuts in a Great Recession

Interest in modern monetary theory and related ideas continues to grow, which is great to see. The efforts of the academic modern monetary theorists and their fellow travelers and supporters continue to bring to light the economic challenges we face and the lies we are all up against. The thought that there will be readers who are relatively new to the approach reminds me that occasionally it is worth getting back to some of the basic insights. The purpose of this post is to illustrate a simple point. The simple point is that it is misguided to cut back public expenditure on services such as libraries, education, health services, and so on, as well as to slash welfare protections for those worst affected by the crisis, when private-sector activity is depressed. In a modern money system – one with a flexible exchange-rate fiat currency – financial affordability is not an issue. The government, as sovereign currency issuer, is not like a household.

The only sense in which affordability can be of concern to a sovereign currency issuer is in terms of real resources. In particular, if the available labor force became stretched to the limit, it might be hard to attract or retain sufficient staff to keep public libraries, schools, hospitals, and other publicly funded or subsidized social institutions operating at current levels without the measures being inflationary. At that point, the community would need to make a choice between cutting the provision of these services or raising taxes to free up resources currently utilized in the private sector. But if, instead, overall demand is weak, and unemployment is high, there is no need for generalized government spending cuts or tax increases, and to implement either would be foolish.

By way of illustration, recall a time when, for a while at least, there was high employment with the economy operating somewhere near full productive capacity. The opening hours of libraries, gardens, and other public facilities were running as normal. There were a certain number of teachers in the schools and medical service providers in the hospitals and health clinics. All this was occurring alongside pretty strong activity in the private sector. Maybe a famous economist or central banker was sufficiently moved to announce that the Great Moderation had arrived and neoliberalism triumphed, but memories can be a little hazy.

One day, as if out of the blue, our private debt levels proved unsustainable. Some of us may have noticed beforehand that we had got ourselves a tad indebted, but mostly we felt confident that, as consenting adults, we knew what we were doing. Unfortunately, many of us hadn’t perceived our peril, and much like presidential declarations of victory in the Middle East, rumors of an end to financial instability turned out to be greatly exaggerated. We could debate the root cause of our predicament – whether it ultimately lay in the real economy or the financial sector, or whether it was a result of falling profitability, demand deficiency, greedy banksters, misallocation of capital, and so on – but for present purposes it is sufficient to note that one manifestation of our woes was a downturn in demand and employment.

Among my own circle of friends, Jack was cut back to only part-time employment on the beanstalk, Cindarella lost her job modeling glass slippers, Humpty was forced to give up a couple of shifts a week at Walmart, or whatever the local equivalent is, and the King’s men (is there a king? I don’t think there is) were relieved of their duties. Many more people suffered similar experiences, the macroeconomic statistics indicating a generalized decline in private-sector activity.

It was at about this time that many of us had the idea to read up on the causes of the crisis. Being a late riser, I turned up at the community library with a couple of friends to do some early evening reading only to discover that opening hours had been cut short as a money-saving measure. Although the government’s initial fiscal response to the crisis had been good by international standards, concerns about affordability and alarming tales of crippling public debt burdens on future generations had seen demands for austerity kick in before long. Unsurprisingly, the cries of insanity were loudest in the seventy percent Murdoch-owned press but shamelessly echoed by the neoliberals infesting the public broadcaster. On economic matters, the public broadcaster is generally an apologist for the ruling class (it is permitted, if it wishes, to be progressive on non-economic matters). Amid falling private-sector employment, the prime minister must have thought it would be too difficult to retain staff for the libraries. Library employees, finding themselves with less income, duly cut their consumption of goods and services produced in the private sector, a win-win (not really) for everybody.

Walking home – economizing on the taxi fare in the spirit of austerity – my friends pointed out headlines at the news stands of planned cutbacks in education and health care. Clearly, with all the underemployed workers around, it was becoming almost impossible to attract or retain teachers and healthcare professionals. The Prime Minister said it would be nice if education for the children could be maintained at the level achieved during the Great Moderation, but it simply wasn’t affordable anymore. Those in need of medical care would also have to be patient – but not literally, due to long waiting lists.

With the benefit of twenty-twenty hindsight – or, at the very least, a kindergarten education – it is easy to see the folly of such a policy approach. Weak demand in the private sector makes public services more – not less – affordable in terms of real resources, which, for a sovereign currency issuer, is the only kind of affordability that matters. The inflationary risk associated with maintaining public sector employment under such conditions is much less – not greater – than it was during the so-called Great Moderation. There are more available workers, not less, and there is more excess capacity, not less. The policy approach also exacerbates the general weakness in demand, which has further effects on output and employment in the economy as a whole.

The collapse in private activity that followed the onset of crisis resulted in less production of goods and services in the private sector, not because there was a lack of productive capacity but because of weak demand. When this is followed by attempted cutbacks in public spending, demand for goods and services and private-sector employment are further depressed. This is a double whammy. The cutbacks result in less public services (such as shorter library opening hours or less funding of education) while at the same time subtracting from income that could be spent on goods and services produced by the private sector. If the cutbacks in library or educational services were enabling more people to eat or be clothed or housed, it would be one thing. But the policy approach is depriving the community of public services while at the same time making it harder for many people to obtain adequate food, clothing and shelter.

This is lunacy. It is a policy approach pursued either out of ignorance or malice. Either way, it needs to be stopped. We, the people, by applying democratic pressure, are the only ones who can stop it and demand a better way.

Actually allow me to refine my question since it does refer to a specific point you make in this post:

“But if, instead, overall demand is weak, and unemployment is high, there is no need for generalized government spending cuts or tax increases, and to implement either would be foolish.”

Given our current political arena and economy, one in which the debate is framed around “affordability” (ie, all spending needs to be “paid” for), I see no other choice than to tax the wealthiest among in an effort minimize the amount of damage. My guess is that we probably agree on that. Certainly let me know if you think otherwise and why.

Outside of “affordability” though, it really bothers me that 6 members of the Walton family (Walmart) have as much wealth as 93M Americans. (Don’t quote me on those numbers or my wording, hopefully you get the idea). Because just image if the situation were reversed and Walmart had a sale. On the whole, it would seem to me that everyone would move forward together. I’m not begrudging anyone their profits, but can we be more reasonable about this?

I suppose this is the question I am really asking, although I reserve the right to change my mind at any time. As well as everything else I’ve said here. 😉

Trixie: Good question. Personally, I am in favor of substantial redistribution of income, including through higher taxes on the wealthy. That was my thinking in writing no need for “generalized government spending cuts or tax increases” (emphasis added). I know this is too pedantic to be picked up by readers unless they are looking for it, but it saved me going in to more on the topic when I was trying to stick to a simple point.

I also think that it is very hard to justify, on moral philosophical grounds, very much income inequality, other than that needed to redress inequalities in capabilities (a la Sen). But that is just my view, which is in no necessary relation to MMT.

Another aspect of the issue is that a high non-government net saving desire is not really a good thing. It can be a reflection of income and wealth inequalities and also the squeezing of public provision of income (especially public pensions), as well as reflecting economic insecurity and instability. The MMT emphasis on a bottom-up approach addresses this to some extent. A job guarantee achieves full employment with the minimum outlay, whereas “trickle down” approaches require higher expenditure for the same employment effect because of the leakage partly to saving at the top.

PS: There should be a search function in the top-right corner of the front page. Does this not show up? If it does and you do a search for the topic of your question, it might not find anything … (because I haven’t discussed the topic much in the past, other than in the occasional comment).

Thanks for the clarification Peter, makes sense. And you bring up an excellent point re: net saving desire. It’s an issue I’ve been trying to conceptually work through. Because something is rotten is the state of Denmark. And I, for one, would appreciate your expanded thoughts.

To add to the to-do list, I second Magpie’s earlier request for a simple tutorial on Marx. Because look, you can confidently state “I am in favor of substantial redistribution of income, including through higher taxes on the wealthy” without having to hide in a closet. It’s a gift. You make Marxism cool, but I have to understand what the hell he was ever trying to say. And it’s not as though I haven’t tried.

And if that’s not enough…no, there is no search feature on this website. There is a title, a sub-title, and your blog posts. Nothing else. Not a thing.

And those do NOT show the sidebars. In either browser. You tricked me, so now it’s back to being a YOU problem. See, THIS is why I’ve been conditioned not to trust communists. You just scored an “own goal”. I hope you’re happy.